Aug. 15, 2020

Capital strategies - what is it and how to develop one? By Jeffrey Silverman.

Capital strategies - what is it and how to develop one? By Jeffrey Silverman.

Jeffrey Silverman, Co-Founder and Managing Partner at Laconia explains the meaning of having a capital strategy and explains how to develop one. We also talk about how much money should founders raise, how long should that money last and how to calculate the ideal amount of funding.

Laconia's website: https://www.laconiacapitalgroup.com/

Office hours with Make it Studio: https://make-studios.typeform.com/to/bUvZoSwl (it's extremely helpful, trust me).


Transcript

This is fundraising radio and today's guest speaker. We have Jeffrey Silverman Co, founder and managing director at cornea and in this episode will focus on the question. That pretty much. Every Foundry is thinking of how much money? 

Shoot, I raise and we'll also talk about capital strategies. What does it even mean to have a capital strategy and how to develop one? So, Jeffrey, last he called by you giving us some background on yourself and article or cornea? 

Well, thank you very much for having me excited to be doing this. Tony was started in two thousand and fourteen by myself and my partner and better half David or Kara. We are a B, two B fund focused fund. 

We are geography focused is northeast of United States, and we do seed stage and Series A. We lead or Co, lead about ninety percent of the deals that we do. 

And we are sector agnostic, so we've done deals that are in digital health. We've done advertise advertising tech. 

We've done ad tech, we've done logistics, we have done supply chain so a little bit of that a little bit of this awesome. You just answered my questions, right? 

Away I was about to ask you, would you like to invest in and what stage you're investing but my next question here would be why are you? Geography focus so you mentioned North North America or is the Northeast so we ignore. Where's that? 

We've got the Northeast. I would tell you is Boston, New York, Philly, DC, so it really about the mid Atlantic up to now. Toronto. Why? We do why we're focused on geography. Let's discuss. This is Pre. 

Covet is because we're pretty active hands on investors. We take probably anywhere from two to four months to due diligence. A company. We work very closely with the founders. 

We focus on three areas with them. We focus on operational execution. 

We focus on sales acceleration, and we focus on the capital strategy, which I know we'll be talking about more in the coming session. Absolutely. 

So we feeling the ability to be able to jump in the subway or jump in a car and a plane for short. 

Can mute and meet with the founders face to face is really important for us. There's just things that, even in the day of coven right now a face to face meeting a roll up the sleeves. 

A whiteboard session is really, really important, and we feel really important that we have those type of close relationships. When a founder says hey, can you swing up tomorrow or can I sit down with you and go over something? 

We feel that it's much better for us. And for them, right the whiteboard means is what I miss the most, I think, you know, this seeing WI, room and brainstorming, you know, physically together. 

It's I may said, but let's, let's not get back just an example and the Northeast is as a territory. 

If you compare it to just San Francisco or anywhere else, it is the largest Ventures area in the in the world. So, New York might be the same number, two behind San Francisco. 

But when you start to add in Boston, New York, Philly, DC and Toronto, you were talking about a very active venture sector of the world most. Definitely. Yes. 
The West Coast, there is the West Coast and there is the East Coast anything between those two not as active yet. 

See, more and more of my speakers investors, speakers coming from those male parts of America. Like, we just I just had an interview published. 

We're the founder of a company was saying how important the Michigan for him is, and how big of a center for for his businesses. So things are changing now signal. Listen, there's no question. 

Covet has personal for coven, the small to medium size markets, a tremendous amount of opportunity. Austin, Boulder, New Orleans, Charlotte, Detroit. So doesn't mean just because we're Northeast. 

It doesn't mean that there's that's the only place to look there are some great companies and as, you know, people can start companies anywhere and code is just if anything, maybe even more, so right, absolutely. 

So we're prepared to see some changes, but let's jump straight to the major subject for today's discussion, which is capital strategist. Can you define what the capital strategy is? What does it mean? Yep. So most people would start a business or so focused. 

Rightfully so on what problem are they trying to solve? They want to build a company that is solving a problem. 

That is a big problem that other people are gonna want to pay for that solution and they're going through the go to market strategy. 

They're discussing what the technology has to be like, what they really don't take the time to do is discuss and think about what is the strategy to raise capital how much do I need. 

And what milestones do I need, 

so we really spend a lot of time during our due diligence, 

which we like to call business planning with the founders, 

try to sit down with them and understanding what their capital needs are going to be. 

And what are the key milestones? So, if somebody comes to us, it says, I'm looking at raise four million dollars. It's gonna last thirty six months. 

That doesn't tell me anything at all, 

because they can't go to a series, 

a lead or series B lead and say well, 

this is the state of our company, 

but we just spent four million dollars and thirty six months that we do we're going to do the person doesn't really care funding is based upon milestones and it could be, 

you know,
how much monthly revenue or annual revenue are having.
Are we seeing sales traction? What is your pipeline? Look like? What's your development of your 
technology? 
There's a lot of things to go into that and so I think it's really, really important for early stage companies to really map out, you know, how much money need to get to those milestones and then confirm those the right milestones. 

So, you could sit there and say, well, I think it's important. I'm gonna use enough money to get to do ten thousand dollars monthly, recurring revenue. 

But the market could've changed and say, you know, what? That's not enough for us. We're gonna walk and really take you seriously until we see twenty five thousand dollars monthly, recurring revenue. Now you've got yourself in a pickle. 

Absolutely, and let's talk about how you can develop those capital strategies and how you can prove that those are actually good capital strategy. So, let's start with the milestones when, you know, the founders before they start raising. 

Of course, they do, they put time into developing those milestones because they themselves needed for the tracking of the company development. But how can they make sure that those milestones are good for the investors? 

Should they actually go out to the potential investors and ask them is a good or is it not something that is acceptable? Right? So, that's a great question. So, you first want to start off with we start off me answer a second question first. 

And that is the longer. You can build your company without going out for capital the better off you're going to be when it comes to ownership stake. Alright, because on average a founder will be diluted twenty to twenty five percent. 

Each time they raise money. 

And so you want to make sure that you have some strong equity position by the time, you want to exit the company, otherwise you given, you've taken such a risk and worked so hard for not for not much return. 

And that would totally suck. So now, go to your first question, you really want to map out some of the goals what you're trying to solve how you gonna have where the bucket is technology. 

You know, 

is it gonna be an Excel spreadsheet is going to be your alpha or and what the beta is going to look at the beta technology gonna look like and what's the first release version one point gonna look like and how much money are you gonna need to get it to those three steps 

you're gonna want to talk about how many customers and how are you going to acquire those customers what is going to needed for the sales and marketing strategy and the employees. 

You might need to hire and then the milestones is it's great to have conversations with the vc's potential investors. 

When you're not looking for money, you have to understand funding is a lot about relationship development. 

And so we will take, you'll spend a year year and a half getting to know founders and I love when they come to us with questions without their handout. And they'll say, listen, I'm not really raising money. 
I will be in six to nine months, but I wanted to start to get on your radar. 
I wanted to start developing relationship with you. I want to get some thoughts on your thoughts of what I'm building. What we're doing. What questions should I be focused on that? I'm not. What? 

Key performance injectors KPI should I be tracking that? I'm not. What are the when would I become interesting to you? Or what size is the company going to become interesting to you? 

And so I can sit there and say, well, listen, we like companies that are starting to do twenty five to seventy five thousand dollars, a monthly recurring revenue. 

And when you start to get the ten to fifteen thousand, we would start to date you and start to go to some started to get to get, you know, your business a little bit better. 

And then the next part for you to start looking at a series. A, you might want there to be a hundred and twenty five to two hundred thousand dollars a month recurring revenue. And there are other aspects that go into this. That's just revenue focused note for our for. 

We're gonna focus on the sales pipeline. We're gonna wanna focus on the pricing isn't stable. Are you still trying to figure out pricing we're gonna want to focus on usage? 

Are the clients actually engage you with the technology that they've purchased or licensing from you? Or are they not? So, there's many different. 

That we're gonna want to look at and so to speak to a founder early on and help to develop this and help them develop some of those milestones is great. The other side of the coin is we want to see how they communicate. 

Are they gonna keep us posted? Are they gonna send out a monthly update? Hey, I said, I was gonna do a B. 

C quarter and I actually did ABC this quarter, or I didn't because at least with our founders, 

one of the many things they have in common is all great communicators and every month or every quarter we get a report from them and they tell us what's going on details how they're doing, 

where they feel short,
so if you're not communicating before you have my money, there's no way to communicate after you have my money. 

Right that's actually a very good point. And the communication is something I want to touch on to just really quick. So, those monthly updates I've seen them quite a few times in. Some of them seem to be just way, way, way, too big. 

So, I know four or five pages. What do you think is a normal size for this monthly update for a potential investor? So what, what was the last thing? 

I want to do the Jimmy sorry the most valuable asset a entrepreneur has is there time. And so the last thing I want to do, or firm wants to do is waste the entrepreneurs time with just doing reports. 

All we like, is the following. We want an email that has the elevator pitch. 

And why the elevator pitch, because the elevator pitch of the company will continue to evolve and change and me as an investor or potential investor. I'm a walking billboard. So I wanna see your 
elevator pitches and I would be reminded what is. 
So, if I'm speaking to other people, I'm actually promoting you and I'm giving the right positioning in the right words that you want me to use. So I wanna see the elevator pitch. I wanna see what good things happen. 

This month, close, three, enterprise clients, increased revenue by ten, ten thousand dollars may three hires whatever it might be, but what good things happen this month we should be aware of bullet points. 

I wonder what bad things happen. This month. Life isn't always roses. 

So, you know, being an entrepreneur and being an investor, we're writing our roller coaster, a Disney World, and I want to know what the downs are I want to do. 

The quick turns are so, tell us what's not going well, and let us work together as a team to address that. 

Anyone should ever be afraid of having bad news for an investor, and what they might do because the good investors will say, alright, I'm aware of it. 

Let's roll our sleeves and let's try to solve the issue once I write that check, we're married and so I can't back out. You can't back out. So let's work together and solve the challenges. So I wonder the bad news. 

And then the last thing is, the ask, 

what's the ask what we're looking to hire a salesperson we're looking for introductions to these five customers and make the ask very specific like, 

when people give a very broad ask,
I'm looking to get a new customer in the consumer packaging industry,
like,
do you wanna C*** general foods?
Are you on a mummy's choice? It could be one extreme to another extreme like where are you. 

But if you mentioned, I'm looking to get in these five companies, and you might have a list of a hundred, but if you're looking at getting these five companies, and at least allows me to understand a nearly do I know one of those companies or wow. 

I see the size they're trying to get into or the stage, or they the sector got it. I can help, so yeah, that's a very specific. That's all. We're looking for. 

Absolutely, and that's great advice. 

I mean, making to ask very specific is crucial, because from what I see, especially in the early stages as the founders, you know, when I asked them, you know, hey, how can I help you know, like, clearly right now and they're, like, just cause them so much. 

I can see in their eyes so please, please, please prepare the specific ask for anyone. You're basically talking to you never know where you're going to find that perfect introduction that you're looking for. 
But, let's move on and talk about something that you mentioned earlier, which is your due diligence process. So you mentioned that you spent, like, four months making the due diligence what is included in the due diligence and why is it taking so long? 

Because on average from what I saw roughly one to two months months is in the long side, it's anywhere from. We can always accelerate it. It's probably two to four months on average. 

So a few things one is some of the some of the time it is based upon that the, the founders aren't fully prepared for the all the material it's gonna be requested. 

So sometimes are get blamed for going slow and I would tell you, that when you start to ask them for their model,
their marketing plan,
their technology roadmap and all the other things that go with it, they really may not have it all put together, 

which is fine,
but they don't expect there to be a quick process. 

And they can see where we are in the process. So we should never be a black hole. And a founder isn't sure they should be able to ask the venture funds. 

They're talking to, where are we, you're in your process what else is coming down the line, because it's not fair to make them feel like they're in a blind or in a black box. 

It's just more so we're very transparent with taking the founders making them aware of where you are in the process. What information we need we usually start with take us to the deck will take us to the financial model and take us to the cap table. 

That's the first pass and with the financial model and my partners Jerry Carol and David or care our masters at it. They really we really dive in on it and I don't wanna use the word challenge, but not a bad way. 

Will challenge the numbers to understand why they put those numbers there and what does that mean and how they derived to that number could be revenue could be how quickly they thought they would close a sale. 

How fast ramp was gonna be we're just trying to get in their head and understand the business as well as they do which we never will, but we try to get as well as we can possibly understand the business and challenge them on questions of. What's interesting. 

Because we're seeing this across other portfolios where our experience of thirty five, plus years operating businesses has shown us this. Why do you think. 

The whole thing is great it's very promising project and I just don't like the guy. That's it. That's it. 

So, yeah, it's a very important thing here, but let's move on and actually get back to the major topic that we're supposed to discuss, which is how much it found a race. Let's pretend that they've developed this set of milestones. 
And how should they plan budget for each in terms of what's the average timeframe that they should 
say? So, like, should they raise mine to last for a year and half? Should the raise to last for three years? 

I, I, I'll go back and push back. It's not time it's not time based, you know, obviously it's gonna take four to six months. Let's just say, six months to raise capital. 

All right so you don't want to raise it is the hardest thing to do is to operative business and raise capital. Okay. It's hard enough to operate business. It's really hard to raise capital and operate business. 

So you want to raise money for twelve months? 

And know that after six months of spending the money, you're already back out in the market and really realistically, how much could have been done between in the last six months are your numbers changed that greatly that your stories? 

So different they're going out to people again. And saying, guess what I saw six months ago, or nine months ago I'm back so yes, we're talking. You should really, really be raising money. That is eighteen to twenty four months. 

But at the end of the day,
if you are doing fifteen thousand dollars,
monthly,
recurring revenue,
and you catch it target by the tail and within eleven to twelve months,
you're now doing one hundred and twenty five thousand and you check you hit the milestones. 

And you want to accelerate then, do it to go out and raise capital. It shouldn't be like. Well, I totally invested. I was gonna raise enough for twenty, four months and it's been twelve and even though hit the milestones. I'm gonna wait for another twelve months. 

Why, if you're gonna slow growth that you need more, get more money, you know, gas in the tank, kill that fire then go out as long as long as you're at those milestones. 

Right. So speaking of milestones, and speaking of current buyers, a lot of companies who develop, you know, great milestones I've seen personally, and loved those companies, they just should not leave up to those Pre, covet expectations after it happened. 

Dynamic broke out. What's your advice to those people? How can they get out of that situation? 

You know, I think early on and we were being, I think one advantage is Coney, having a concentrated portfolio is we were able to at the end of February, early March and I'll steal something from former president. 

George Bush was the first phase of code was shocking. 

And we're able to, since we are country portfolio, roll up our sleeves and sit down with each of our founders, and really ensure that we're able to tighten the budget and make the and work with them to make the necessary changes to preserve cash. 
Because at the end of day, 
cashes King, 
you know, 

we've had one company that, 

you know, 

has a great client base and really cut back really a lot because the restaurants and other customer base they had, 

we're,
we're,
we're shutting down. 

So, you know, to keep people employed and increase your burn when they're all on their own high, it doesn't do any good. And as they're starting to come out of a high is they're starting to loosen up and start to accelerate. So, it was okay during code. 

And hopefully, these companies quickly saw that. Oh, wait a second. There's a lot of uncertainty here. I'm gonna pull back. 

I'm gonna cut costs and I'm going to focus on maybe just developing the technology and not focusing on sales right now and and cut everything back. 

And as things start to open up, I'll start to hire people back again, you know, from an invest perspective, there's no question we have to have a covet landsite, you know, looking at the saying, okay, how does this business now? 

Look is this business exciting in the new world of over the next eighteen to twenty four months potentially. 

And it was exciting beforehand as it's so exciting or is it Wow you know, we did a deal. We just closed the deal no worth that. 

We were talking to them since October of last year we passed on twice and as covet came, 

it was what was needed for that company to go from a nice to have to a must have and although two percent of the business volume going to the system. 

Is coven patient related it was coverage caused the, the client base too now needed and and accelerated. 

We lead the deal in March, but again, coban was good for that business to accelerate the adoption of a digital platform for in the healthcare sector. So, I think it's really, you know, you really gotta be focused on. 

Exactly. Is it going to help your business or is it not gonna help your business if it's not gonna help your business, can you pull back to burn and make it last? Until we get through the other side. 

So that's great advice and you kind of answered my next question. So let's jump into the last question. Your mind. That's how we're connected. Absolutely, absolutely. So, let's move on to that. Wait a second. 
Can you read the last question I have for today? I'm not even looking at the questions, we're just 
having a conversation, can you can you read my mind? That's on your mind. Yeah, yes. I'm having tonight I'm having, I think, tacos on mute. 

I would invite you. Well, that's that's actually close enough because my call to action what's the one thing that you would like to do? 

As soon as that it was over tacos excluded the one. Okay. So one thing I'd want the listeners to do. Alright, this is gonna be there's gonna be a little bit different than what we've been talking about. 

I would say you, the most frustrating thing for me is people do not really know how to develop relationships. 

And what I mean, by that is, we probably have ten to fifteen meetings or pitches a week and I might get one or two Thank you emails or follow up emails. 

It gets very tiresome for people to reach out with asks only. And if they don't like the answer, or they don't think you're interested, they leave. 

The last three companies we have funded, we have said, none of those founders two or three times. 

And we kept, they kept in touch with us, we continued the relationship and within six to eighteen months, we ended up finding them because they either the business got to a place where we think the business got to a place where we're like. Wow, we really like this and we got to know them better. 

I was like, wow, the great communicators. So I would guess long winded. Answer was I want people when they get off this. Hopefully, they've learned to enjoy it. 

But I want them to really think about how they developed relationships and take just realize how important is timely. Communication is, you know, I'm a little bit older. 

The you and I had to write a handwritten note, put into an envelope, write the address, put a stamp on it and probably, most of this is don't know what I'm talking about post office and drop in the mail. 

All they have to do is get on their phone and send me an email. Right? Ninety five percent of people don't do that. Absolutely. Yeah. That's not nice. 

I think actually the hand reading E, mail is not such a bad idea. I imagine that if someone in twenty twenty receives a, thank you note, in a hand written way, that would be so shocked they will definitely respond. 

So, my cultivation seriously would be go out check, check out some people who helped you in the past. Because I can guarantee you that there were some people who helped you just check in with them, say, you know, a, do you need any help from me I'm just. 

Here to say, thank you. So keep doing promotional running yeah. 

Fundraising and fundraising is all about relation development walk into some VC or some, you know, family office or angel and say hi, you don't like my deal. You write me a check. It's not gonna happen. 

And if you're not developing, you're not able to communicate with with them. Now then, why would I think you're going to be able to communicate what's my money has been wired to you all right absolutely. 

So, yeah, 
just make sure that you follow up with people if you have if you've reached an investor your project, and they said,
nope,
still follow up and say, 

you know,
thanks for your recommendations, 

because ninety nine percent chance that those investors will explain why exactly they're passing on the deal. 

So, do that make sure you're nice to people because people who are nice are more likely to attract capital and have a great day.